Beware of Tax Hikes That Could Impact Energy Renaissance

Mark Green
Posted August 19, 2016

In a political year it’s possible some may try to politicize tax policy as it pertains to the oil and natural gas industry. Let’s start with some facts on energy and taxes:

• The tax treatments industry receives are not subsidies, as often is claimed by some.
• Deductions available to our industry are similar to those that allow other industries to deduct operating expenses. In the oil and gas business, outlays to drill and prepare wells are direct investments in the U.S. economy and jobs, and they help industry supply the energy our country needs.
• Our industry contributes about $60 million a day on average to the federal government in income taxes, rents, royalty payments and fees.

The first point above is important, because folks who know better – or should know better – often refer to legitimate tax deductions available for use by industry as subsidies. They are not.

The “s-word” frequently gets bandied about in discussion of the deduction for intangible drilling costs or IDC. The IDC is a cost-recovery mechanism that has allowed oil and natural gas companies to deduct the upfront costs of well preparation, drilling and other related expenses since 1913. It’s similar to the deduction that permits pharmaceutical companies and biotech firms to recover research and development costs.

In our business the cost of exploration, drilling and other associated expenses typically accounts for 60 to 80 percent of the cost of a well. Being able to recover those costs through the deduction is key to maintaining cash flow that helps companies drill more wells, keep producing the energy our country needs and to create jobs. A study a few years ago showed that repealing the IDC deduction would hinder investment and likely result in lower energy production – neither of which would be good for the U.S.

Another favorite target of those who would raise taxes on a vital domestic industry is the manufacturers deduction, established in 2004 to help U.S. companies maintain and create jobs. The deduction is available on qualifying income from all domestic manufacturers at 9 percent – though for our industry it’s limited to 6 percent. Doing away with the manufacturers deduction only for oil and natural gas companies would be discriminatory and could put jobs and energy development at risk.

Now let’s look at the larger picture – one with more context than the caricature some use to single out our industry as the “pay-for” in plans where government is in charge of redistributing resources. Here’s a look at earnings:

While oil and natural gas industry earnings usually are in line with other major U.S. manufacturing sectors, that hasn’t been true recently. From 2011 to 2015 published data shows our industry earned 3.9 cents for every dollar of sales, compared to 8.7 cents per dollar of sales for all manufacturing. Now effective tax rates among industries:

As you can see, averaged over 2010-2015, the oil and natural gas industry led other business sectors with an effective tax rate of 38.7 percent. This reflects total income taxes, which include income taxes imposed by federal, state and foreign governments, divided by pretax income. U.S.-based oil and gas companies plan operations and investments based on where the resource is found, which often involves overseas investments that are subject to very high effective tax rates.

Again, looking at the full picture, the oil and natural gas industry – unlike some sectors that benefit from tax credits and the like – makes significant contributions to the U.S. Treasury. It should not be targeted for higher taxes that could discourage investment and energy development. There’s a discussion to be had about broad tax reform that treats all energy the same, and which industry supports. Singling out one energy for tax hikes isn’t that discussion.

The U.S. leads the world in the production of oil and natural gas, which supplied about 65 percent of the energy our country used last year. Thanks to the American energy renaissance, our country is more energy secure, we’re able to help overseas allies through the export of domestic crude oil and liquefied natural gas and we lead the world in reducing energy-related carbon emissions, largely because of increasing use of cleaner-burning natural gas.

This successful U.S. energy paradigm shouldn’t be put at risk by imposing higher taxes on the energy producers. Americans agree. In a recent poll 66 percent of registered voters said they oppose higher taxes that could decrease energy production. In a year where everyone is poll-conscious, it’s an opinion that should be heard.